
on Dynamic General Equilibrium 
By:  Collard, Fabrice; Licandro, Omar 
Abstract:  This paper embeds firm dynamics into the Neoclassical model and provides a simple framework to solve for the transitional dynamics of economies moving towards more selection. As in the Neoclassical model, markets are perfectly competitive, there is only one good and two production factors (capital and labor). At equilibrium, aggregate technology is Neoclassical, but the average quality of capital and the depreciation rate are both endogenous and positively related to selection. At steady state, output per capita and welfare both raise with selection. However, the selection process generates transitional welfare losses that may reduce in around 60% long term (consumption equivalent) welfare gains. The same property is shown to be true in a standard general equilibrium model with entry and fixed production costs. 
Keywords:  Firm dynamics and selection; Neoclassical model; Capital irreversibility, Investment distortions; Transitional dynamics, Welfare gains 
JEL:  E13 E23 D6 O4 
Date:  2021–09–07 
URL:  http://d.repec.org/n?u=RePEc:tse:wpaper:125924&r= 
By:  Josué Diwambuena; Raquel Fonseca; Stefan Schubert 
Abstract:  This paper investigates how Italian labour market institutions influence business cycle fluctuations. We apply a DSGE model that features Italian labour market rigidities and we estimate the latter on Italian data using Bayesian techniques to assess the effects of demand, supply, and labour market shocks on the macroeconomy, and to measure their significance for economic fluctuations. Our results show: First, technology, time preference and wage bargaining shocks are key drivers of economic fluctuations across horizons. Second, matching efficiency and wage bargaining shocks are significant sources of unemployment and vacancies fluctuations but their role is limited for output fluctuations. Third, labour market relaxation policies have only marginally contributed to the reduction in unemployment. Last, accounting for wage rigidities influences labour market dynamics and helps the model to fit data well. We, therefore, urge policymakers to support additional changes in labour market institutions. 
Keywords:  DSGE, Labour market frictions, Bayesian estimation, Italy. 
JEL:  E24 E32 C51 C52 
Date:  2021 
URL:  http://d.repec.org/n?u=RePEc:rsi:creeic:2105&r= 
By:  Pierri, Damian Rene 
Abstract:  This paper deals with infinite horizon nonoptimal economies with aggregate uncertainty and a finite number of heterogeneous agents. It derives sufficient conditions for the existence of a recursive structure,an ergodic, a stationary, and a nonstationary equilibria. It also gives an answer to the following question: is it possible to derive a general framework which guarantees that numerical simulations truly reflect the behavior of endogenous variables in the model? We provide sufficient conditions to give an affirmative answer to this question for endowment economies with incomplete markets and uncountable exogenous shocks. These conditions guarantee the ergodicity of the process and hold for a particular selection mechanism. For economies with finitely many shocks or for an arbitrary selection in economies with uncountable shocks, it is only possible to show that a computable, time independent and recursive representation generates a stationary Markov process. The results in this paper suggest that often a well defined stochastic steady state in heterogenous agent models is sensitive to the initial conditions of the economy; a fact which imply that heterogeneity may have irreversible longlasting effects. 
Keywords:  NonOptimal Economies; Markov Equilibrium; Heterogeneous Agents; Simulations 
JEL:  C63 C68 D52 D58 
Date:  2021–09–07 
URL:  http://d.repec.org/n?u=RePEc:cte:werepe:33246&r= 
By:  Okano, Eiji; Eguchi, Masataka 
Abstract:  In this paper, we analyze the effects of moneyfinanced (MF) fiscal stimulus and compare them with those resulting from a conventional debtfinanced (DF) fiscal stimulus in a small open economy. We find that in normal times which is a period when a zero lower bound (ZLB) on the nominal interest rate is not applicable, MF fiscal stimulus is eﬀective in increasing output. In a liquidity trap where the ZLB is applicable, even though the decrease in both consumer price index (CPI) inflation and output is more severe than in a closed economy when there is no fiscal response, MF fiscal stimulus is effective in stabilizing both. Accordingly, we show that even in an imperfect passthrough environment including a liquidity trap, an increase in government expenditure under MF fiscal stimulus is eﬀective. In contrast, our policy implications concerning an increase in government expenditure under DF fiscal stimulus lie opposite to Gali, Jordi (2020), “The Effects of a Moneyfinanced Fiscal Stimulus,” Journal of Monetary Economics, 115, 119, assuming a closed economy. In normal times, an increase in government expenditure under the DF scheme in a small open economy is more eﬀective than in a closed economy, although Gali (2020) argues that it is much less effective. In a liquidity trap, an increase in government expenditure under the DF scheme is less eﬀective, also in contrast to Gali (2020). We find that even in an imperfect passthrough environment, an increase in government expenditure under DF fiscal stimulus is not effective. Thus, in a small open economy, MF fiscal stimulus is not always essential in normal times, and in a liquidity trap, MF fiscal stimulus is more important than what Gali (2020) suggests because DF fiscal stimulus is not effective, irrespective of nominal exchange rate passthrough. 
Keywords:  Fiscal Stimulus; Money Financing; Debt Financing; Zero Lower Bound; Imperfect Passthrough 
JEL:  E31 E32 E52 E62 F41 
URL:  http://d.repec.org/n?u=RePEc:cpm:dynare:070&r= 
By:  Maih, Junior; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka 
Abstract:  We analyse the implications of asymmetric monetary policy rules by estimating Markovswitching DSGE models for the euro area (EA) and the US. The estimations show that until mid2014 the ECB’s response to inflation was more forceful when inflation was above 2% than below 2%. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute an optimal simple rule for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades. JEL Classification: E52, E58, E31, E32 
Keywords:  Bayesian Estimation, effective lower bound, Inflation targeting, Markovswitching DSGE, optimal monetary policy 
Date:  2021–09 
URL:  http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212587&r= 
By:  Christian Merkl; Heiko Stüber 
Abstract:  We document substantial crosssectional heterogeneity of German establishments’ real wage cyclicality over the business cycle. While wages of the median establishment are moderately procyclical, 36 percent of establishments have countercyclical wages. We estimate a negative connection between establishments’ wage cyclicality and their employment cyclicality, thereby providing a benchmark for quantitative macroeconomic models. We propose and calibrate a labor market flow model to match various empirical facts and to perform counterfactual exercises. If all establishments behaved as the most procyclical ones, labor market amplification would drop by onethird. If all followed Nash bargaining, it would drop by more than twothirds. 
Keywords:  wage cyclicality, employment cyclicality, labor market flow model, labor market dynamics, establishments, administrative data 
JEL:  E32 E24 J64 
Date:  2021 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_9283&r= 
By:  Coenen, Günter; MontesGaldón, Carlos; Schmidt, Sebastian 
Abstract:  The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policyrate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New AreaWide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as re ected in negative biases in in ation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interestrate forward guidance and largescale asset purchases. When considering alternatives to in ation targeting, wefind that makeup strategies such as pricelevel targeting and averagein ation targeting can, if they are wellunderstood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound. 
Keywords:  Effective lower bound,monetary policy,asset purchases,forward guidance,makeup strategies 
JEL:  E31 E32 E37 E52 E58 
Date:  2021 
URL:  http://d.repec.org/n?u=RePEc:zbw:cfswop:656&r= 
By:  Matthew D. Cocci; Mikkel PlagborgM{\o}ller 
Abstract:  Calibration, the practice of choosing the parameters of a structural model to match certain empirical moments, can be viewed as minimum distance estimation. Existing standard error formulas for such estimators require a consistent estimate of the correlation structure of the empirical moments, which is often unavailable in practice. Instead, the variances of the individual empirical moments are usually readily estimable. Using only these variances, we derive conservative standard errors and confidence intervals for the structural parameters that are valid even under the worstcase correlation structure. In the overidentified case, we show that the moment weighting scheme that minimizes the worstcase estimator variance amounts to a moment selection problem with a simple solution. Finally, we develop tests of overidentifying or parameter restrictions. We apply our methods empirically to a model of menu cost pricing for multiproduct firms and to a heterogeneous agent New Keynesian model. 
Date:  2021–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2109.08109&r= 
By:  Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School) 
Abstract:  We ask whether Bayesian estimation creates a potential estimation bias as compared with standard estimation techniques based on the data, such as maximum likelihood or indirect estimation. We investigate this with a Monte Carlo experiment in which the true version of a New Keynesian model may either have high wage/price rigidity or be close to pure flexibility; we treat each in turn as the true model and create Bayesian estimates of it under priors from the true model and its false alternative. The Bayesian estimation of macro models may thus give very misleading results by placing too much weight on prior information compared to observed data; a better method may be Indirect estimation where the bias is found to be low. 
Keywords:  Bayesian; Maximum Likelihood; Indirect Inference; Estimation Bias 
JEL:  C11 E12 
Date:  2021–09 
URL:  http://d.repec.org/n?u=RePEc:cdf:wpaper:2021/22&r= 
By:  Chakrabarti, Anindya S.; Mishra, Abinash; Mohaghegh, Mohsen 
Abstract:  Income distributionbased targeted interventions are quite common in developing economies. However, often due to institutional frictions, identification of the recipients happens at a lower frequency than the frequency of movement across income groups, leading to misidentification of true and false recipients. What are the general equilibrium effects of such interventions? To measure the effects, we develop a heterogeneous agent production economy where agents face uninsurable income risks and we calibrate it to a novel panel dataset on monthly household income and consumption in India. We study the effects of persistent (identitybased) shocks as opposed to the usual temporary (incomebased) income shocks, the difference being that in persistent payments individuals are guaranteed a payment across periods, regardless of their income status in future. We find that temporary interventions have muted distributional effects, while identitybased stimulus of the same size give rise to more prominent effects. In particular, a persistent income shock to the poorest decile equivalent to 0.6% of GDP leads to a 0.543% increase in consumption. 
Date:  2021–09–13 
URL:  http://d.repec.org/n?u=RePEc:iim:iimawp:14661&r= 